The United Nations Conference on Trade and Development (Unctad) reports that global foreign direct investment (FDI) collapsed in 2020, decreasing by 42% to an estimated $859-billion, compared with about $1.5-trillion in 2019.
FDI finished the year more than 30% below the trough after the global financial crisis in 2009 and was back at a level last seen in the 1990s.
According to Unctad’s latest 'Global Investment Trends Monitor', the decline was concentrated in developed countries, where FDI flows fell by 69% to an estimated $229-billion.
Flows to Europe dried up completely, including large negative flows in several countries.
FDI in the European Union fell by two-thirds, with major declines in all the largest recipients; flows to the UK fell to zero.
A sharp decrease of 49% to $134-billion was also recorded in the US.
The halving of FDI inflows to the US was owing to sharp drops in both greenfield investment and cross-border mergers and acquisitions (M&As).
The decline in developing economies was relatively measured at 12% to an estimated $616-billion.
The share of developing economies in global FDI reached 72% – which was the highest share on record. China topped the ranking of the largest FDI recipients.
The fall in FDI flows across developing regions was uneven, with a decrease of 37% in Latin America and the Caribbean, a decrease of 18% in Africa and a decrease of 4% in developing countries in Asia.
East Asia was the largest host region, accounting for one-third of global FDI in 2020.
FDI to transition economies, meanwhile, also declined by 77% to $13-billion.
FDI in China, where the early phase of the pandemic caused steep drops in capital expenditures, ended the year with a small increase of 4%. FDI in India rose by 13%, boosted by investments in the digital sector.
FDI in the Association of Southeast Asian Nations – which have been an engine of FDI growth throughout the last decade – was down 31%.
Looking ahead, Unctad expects the global FDI trend to remain weak in 2021. Data on an announcement basis, an indicator of forward trends, provides a mixed picture and point at continued downward pressure, it states.
Sharply lower greenfield project announcements, down 35% in 2020, suggest a turnaround in industrial sectors is not yet in sight, Unctad points out.
Upticks in the fourth quarter of 2020, however, dampened earlier declines in newly announced international project finance deals.
International investment in infrastructure sectors could therefore prove stronger, also buoyed by economic support packages in developed countries.
Similarly, the 10% decline in cross-border M&As last year was cushioned by higher values in the last part of the year. Looking at M&A announcements, strong deal activity in technology and pharmaceutical industries is expected to push M&A-driven FDI flows higher.
For developing countries, the trends in greenfield and project finance announcements are a major concern, states Unctad.
Although overall FDI flows in developing economies appear relatively resilient, greenfield announcements fell by 46%, comprising a 63% fall in Africa; a 51% fall in Latin America and the Caribbean, and a 38% decline in Asia, while international project finance grew by 7% globally, and fell 40% in Africa.
Unctad says these investment types are crucial for productive capacity and infrastructure development and thus for sustainable recovery prospects.
Risks related to the latest wave of the pandemic, the pace of the roll-out of vaccination programmes and economic support packages, fragile macroeconomic situations in major emerging markets, and uncertainty about the global policy environment for investment, will all continue to affect FDI in 2021.